consumption tax

Living in another country can be inconvenient in many ways and its often the ones you least expect that end up annoying you the most. I generally try not to be one of those people that look at other countries as weird or wrong. I avoid making the assumption that the way I’m used to things being done in my home country is the ‘right way’ or the way things should be done. That said after much consideration I have come to the unfortunate conclusion that the Japanese consumption tax system is bloody stupid.

Its not that I have a problem with taxes themselves consumption tax or otherwise. Its more the way the stores display prices and the way it seems to be calculated. For those of you either not living in Japan or who just aren’t very observant consumption tax in Japan is added to the price displayed rather than already being calculated into it. This seems pointless in several ways as firstly it results in lots of uneven and non-rounded prices leading to more small change but also because it makes calculating what you need to pay slightly more difficult. It would be a different matter if there were some people that didn’t need to pay this tax even if they were only a small minority. For example in the UK many office stationary, wholesale and hardware catalogues wont include VAT (British consumption tax) in the price but will list it separately. This makes sense as many of the consumers will be companies who potentially don’t need to pay the tax or will collect it from a secondary customer when they resell the product. When buying a bottle of coke in a Japanese convenience store though you will have to pay the tax regardless of your circumstances. So why then do all the stores insist on listing the prices as the non tax prices with the actual price either not displayed or displayed in tiny writing below the non-tax price. I’m fairly sure there isn’t a law saying they have to display it this way as many other stores and businesses don’t.

There are a whole host of problems I have with this odd way of displaying consumption tax. The first is simply the convenience for the consumer. I like to be able to know how much I’m going to need to pay before going to the till and this makes it more difficult to calculate in my head. Also many tills have the annoying habit of displaying the non tax price total first despite this being a totally irrelevant number that doesn’t need to be displayed. The actually total price only appears after the cashier pushes another button something they don’t always do right away. As a result I’ve had several embarrassing situations where I have put down the amount the till display shows only for the cashier to then push another button changing the price and looking at me like I’m an idiot. It would be annoying but manageable if every shop was the same but some actually display the correct price which leads to the equally embarrassing situation of me standing there doing nothing after the price has been totalled and the clerk once again thinking I’m an idiot for not paying fast enough.

Beyond this minor annoyance thought I have several larger reasons for disliking this system. First of all I think its bad from a societal prospective as it doesn’t give businesses an incentive to keep after tax prices the same after a tax rise. What I man by this is that when tax goes up in the UK prices for the consumer often don’t as the big businesses don’t want to risk losing businesses by raising prices if their competitors might not. As such big supermarkets and chain stores will often keep prices the same and take a small hit to their profits rather than pass tax rises on to the customer. When the tax rise from five to eight percent happened in Japan all the prices actually went up which hit overall consumption and reduced the amount of things people bought which could potentially lead to the government getting less tax overall despite the higher percentage tax.

The aim of a tax system is to get the money needed to run society with as little inconvenience as possible for the common people or at least it should be. By allowing businesses to display pre-tax prices they have taken away any incentive these businesses have to smooth the transaction or reduce their prices to keep the overall price the same.

The final reason I don’t like this way of displaying tax is that I suspect its actually leading to some form of over or underpayment of tax due to the need to have the price be a whole number. While on an individual transaction this is a meaninglessly small amount for a large business making millions of transactions each month is could result to a huge discrepancy is what tax should be paid and what is actually ending up in government hands.

Think of it this way, for a simple price like ¥ 100 it becomes ¥108. No problem but for a price like ¥99 it should be ¥106.92 (99+7.92) which is clearly unusable as you cant take payment of a fractional yen. As such the business needs to round the number and as it’s so close to being ¥107 they tend to round up. This means that on a great number of transactions the individual is actually being overtaxed by a tiny amount. The opposite will also happen with some prices being closer to the lower number so being rounded down. Its likely that overall the two differences mostly even out but there is still likely to be a difference. So either the business have overtaxed people overall or under taxed them. What happens with that difference? Does the business pass on the over collected tax to the government or do they keep it for themselves. If the tax has overall been slightly under-collected due to rounding does the government simply get less money or does it come out the businesses pocket. They is likely a very clever and intricate bureaucratic accounting system that resolves this problem but whatever overly complex system they’ve created isn’t really needed as they could have set the consumer price first then taken 8% of it leading the the non whole number being on the price before tax rather than the final price. As businesses and governments dealing with accounts can account for partial yen this would entirely remove the problem.

But wait. It gets even better from the societal prospective as changing to this system would see the government collect more tax from the same consumer price. If a product is to be sold at ¥108 then the tax on it would be ¥8.64 which is more than it is now. With the example above of the rounded up price to ¥107 it would instead become ¥8.56 in tax making a pre-tax price for the business of ¥98.44. The business would have their prices being the fractional ones rather than any rounding being involved. There’s no need for a business to have whole number pre tax prices as that’s not what they are going to collect from the consumer. If the business decides that it absolutely needs to get at least ¥99 from this sale then they can put the consumer price up to ¥108 instead and can deal with the consumer knowing that they have raised their prices to make a bigger profit rather than hiding behind the excuse of consumption tax. Best of all those cases mentioned earlier of underpaid tax would also be fixed by this change.

Businesses would get other advantages to compensate them for the slight increase they may end up paying. For example this change would allow businesses to set more rounded prices if they wished likely without the consumer complaining. Having a price of ¥108 is actually a bit odd. Why not use ¥105 or ¥110. Either price would be preferred by the consumer as they wouldn’t end up with one yen coins as change. It would also allow the Business to keep less one yen coins and reduce the number of smaller coins in their float. This would reduce the amount of work for businesses banking services which would hopefully lead to a reduction in costs which could be passed on to the business customers. Continue this line of thought to its logical conclusion across society and you could see less use of one yen coins overall which could lead to a reduction in the number that need to be minted each year. Given that small denominations often cost more to mint than their face value this would lead to another saving for the government and therefore the taxpayer.

I can see no major disadvantage of this system for either the government or the consumer. Ever for businesses I can see very little disadvantages as in many cases it will all even out and they will still end up with the same prices and tax. The difference is simply that the fractional yen end up being on the side of people who are actually able to deal with fractional yen.

While my academic and previous employment background is in accounting and tax I don’t claim to be an expert in the subject. If you can see a reason for the current system or a better way to resolve the problem please comment below.

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